The wholesale and retail industry continues to feel negative effects from that day, April 2, 1993, when Philip Morris launched a major discount promotion for its top cigarettes and from its subsequent decision to make those cuts permanent about a year ago, said an industry panel convened at the summer convention of the American Wholesale Marketers Association here.
The scars from that burn, plus the likelihood of further hits on tobacco profitability from hikes in excise taxes, have awakened retailers and wholesalers to the need to crawl out from under their dependence on tobacco for sales and profit growth, the panel said.
"Marlboro Friday was a wake-up call. It took 20% out of the gross profits for some wholesalers," said Steve Stomel, president of Josh H. Stomel & Sons, Berlin, N.J., a wholesaler and a member of the panel. "We realized that 75% of our business is tobacco."
"It gave us a wake-up call, too," said Warren Peterson, merchandising and purchasing manager for convenience store retailer Total Petroleum Co., Denver. His company's realization: "Cigarettes are diminishing" as a piece of the retail pie.
"Our idea was to protect our margin, to keep the dollars the same. That did not happen. The manufacturers had less dollars to spend at retail, and we were not looking at other avenues for profit," the retailer said. He added that the effects at retail still were not as pronounced as they were at the wholesale level.
"In the short term, [Marlboro Friday] has put our survival at risk. It has taken bottom line profit out of our system," said Ron Sosnick, president of Sosnick Cos., a wholesaler based in Pleasanton, Calif., commenting on his industry's dilemma in the
Even before the Philip Morris cuts, savvy wholesalers were recognizing the import of unit declines in sales of cigarettes and steeling themselves to the ramifications, Sosnick explained. But they did not expect those price decreases and their ramifications to hit so rapidly.
Some wholesalers are still bitter about that surprise, and expressed that bitterness during the panel discussion.
"I find it interesting that, with all the talk of partnerships in the industry, that stroke did not show much partnering," commented one wholesaler from the convention audience. "[Philip Morris] even said that when they did it, it was everyone for themselves."
Panelist and tobacco wholesaler Stomel responded by putting his own wounds into context. "As angry, as frustrated as I was, long-term, I'm not sure it was not the right thing for Philip Morris to do. They brought down the price at retail, and that increased the product's value to consumers.
"It was very self-serving [of Philip Morris], but it made us look at our dependency on tobacco. It is not right for us to look at the manufacturer to take care of us."
Another panelist pointed to the fact that more harsh revelations lay ahead. "This increased the number of wholesalers who won't be around in the future," said Jim Colucci, senior vice president of marketing and sales for Consolidated Cigar Corp., Fort Lauderdale, Fla.
A second manufacturer on the panel, Art Drogue, vice president of direct sales at Nabisco Foods Group, Winston-Salem, N.C., said he'd heard some wholesalers say the fallout won't be all bad, "because it will force some of those who were not being effective out of business."
The tobacco industry's current travails also had the panel, and the AWMA audience, concerned about further damage to sales and profits. One attendee expressed his worries about looming increases in federal excise taxes for tobacco.
Wholesaler Stomel said that while a 50-cent hike in taxes on cigarettes might not be that harmful, anything above that would likely hurt. "In Canada, the industry saw massive black marketing" in response to tax hikes, he added.
"Consumption will go down as the price goes up," agreed Sosnick. "At $2 a pack and $20 a carton, the majority of wholesalers will go out of business."